A hedge-fund liquidation has wiped billions from Chinese and US stocks, and no one knows what's going to happen next

Brendan McDermid/Reuters

• Credit Suisse and Nomura said on Monday that they could take big hits from their exposure to a US hedge fund.
• The fund, reported to be Archegos Capital Management, triggered $20 billion worth of selling on Friday.
• Some analysts said the selling could blow over, but others are worried it could have a wider impact.
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Two major banks have said they could face big losses from their exposure to a hedge fund, leaving traders and investors wondering what happens next.

Among the banks hit by the wave of selling was Credit Suisse, which said on Monday that it and other unnamed lenders were selling positions related to the fund. Traders were guessing about who was exposed ahead of the US market open.

Reports over the weekend said Archegos Capital Management had been at the root of about $20 billion worth of sales of companies such as the US media group ViacomCBS and several Chinese tech stocks including Tencent and Baidu.

Archegos manages the wealth of Bill Hwang, a protégé of the famous Tiger Management hedge fund who pleaded guilty to wire fraud in 2012. Its website has been taken offline, and the firm was unavailable for comment.

Morgan Stanley and Goldman Sachs, which acted as lenders to Archegos and processed some of its trades, forced the fund to sell shares to cover potential losses after the price of Viacom started to tumble, the Financial Times reported on Sunday. The sales wiped about $35 billion of market value from certain companies on Friday.

Morgan Stanley and Goldman Sachs did not respond to a request for comment.

On Monday it became clear that other banks were caught up in Archegos' sales when Credit Suisse and Japan's Nomura issued warnings to investors.

Credit Suisse's shares tumbled as much as 14% after it said the losses stemming from its involvement with a US fund "could be highly significant and material to our first quarter results." Nomura slumped 16% after it said it could take a $2 billion hit.

The Swiss bank said a "significant US-based hedge fund" had failed to meet margin calls. A margin call is a demand from a lender that a borrower stump up more cash to cover potential losses on its bets.

Credit Suisse said that it and "a number of other banks" were selling the fund's investments, generating uncertainty about who was exposed. The bank declined to comment further.

Markets worry about more selling

"Billions of dollars in block trades went through on Friday," Steen Jakobsen, the chief investment officer at Saxo Bank, said in an email. "And there is uncertainty over how much more of the hedge fund's holdings remain and could hit the market this week."

He added that "whether the Archegos situation is a unique one is the top point on the agenda early this week."

Paul Donovan, the chief economist at UBS Wealth Management, said in an email that "investors are looking with some concern at the prospect of further large sales hitting financial markets."

Donovan said that the sales were so far relatively small and that the issue was unlikely to cause widespread damage.

"Does this have any economic implications? Probably not," he said. "Some parts of the financial system may experience losses, but it seems unlikely that this will threaten the financial system's stability."

But Bill Blain, a strategist at London's Shard Capital, told Insider that markets were already seeing a wider impact, citing Nomura's and Credit Suisse's warnings and the subsequent share-price falls.

Blain said he suspected the problems at Archegos were due to "over-leverage," or when a firm borrows large amounts to fund investments, making it more vulnerable to shocks.

The strategist said that though banks had been far safer since the financial crisis, the so-called nonbank financial sector was still engaged in highly risky activities.

"The amount of speculation out there is huge, and it's increasing," he said.

Blain added: "I think people are going to be looking very anxiously exactly what their margin positions are and that may itself trigger some market changes."

European banking stocks suffered on Monday morning. Credit Suisse was down by 13.7% at 7:40 a.m. ET, UBS was down 3%, and Deutsche Bank was down 3.4%.

UBS and Deutsche Bank both declined to comment. A person familiar with the matter said that though Deutsche Bank was involved, its exposure was a fraction of other banks'.

There were few signs of wider market stress on Monday morning, however, with US futures slightly down and bond yields only fractionally lower.

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